EMERGING MARKETS-EMEA FX risk rally pauses, but weekly gains on tap

Most emerging market currencies in Europe, the Middle East and Africa fell on Friday as a risk rally paused, but were still set for weekly gains on the back of supportive central bank actions and optimism over more U.S. stimulus. Emerging market (EM) stocks also came off record highs, but were on track for strong gains for a fourth straight week.

EM currencies had come off recent gains late on Thursday as concerns over the rapid spread of the coronavirus and the timing of vaccine programmes in developing economies prompted some profit taking. But optimism over a bumper U.S. stimulus package, as well as continued monetary and fiscal support saw most currencies set for weekly gains.

EM stocks were also set to outperform their peers in the developed world for the week. "We believe the Biden administration’s focus on tackling the pandemic and supporting the economic recovery bodes well for EM assets, which have stabilized after an eventful start to the year," Christian Keller, head of economics research at Barclays wrote in a note.

Turkey's lira fell about 0.9% on Friday, but was set to add 0.6% for the week after the central bank held interest rates and promised tight policy to battle double-digit inflation and any lira weakness. "Since president Tayyip Erdogan has recently called for rates to be brought down again as soon as possible- the market was watching for signs that central bank of Turkey may be backing away from further hikes," Tatha Ghose, FX and EM analyst at Commerzbank wrote in a note.

"But, none of this was in evidence in yesterday’s statement." South Africa's rand fell 1%, but was set to add 0.9% for the week. The country's central bank also kept interest rates steady on Thursday.

BofA flow data showed EM assets enjoyed their third largest ever debt flows in the week to Wednesday of $4.3 billion, with equities attracting large inflows of $4.1 billion. Russia's rouble, which fell about 0.9% on Friday, was set to lag its peers for the week, with Russian stocks marking a similar trend.

Concerns over western sanctions against Moscow had hurt appetite for Russian assets, while weakness in oil prices also weighed. In Central Europe, Hungary's forint outpaced its peers this week on expectations of a quick economic recovery.

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